Celebrating the 20th anniversary of Randstad Regio last week in Brussels, the question arose what the future is for European regions. The economic crisis seems to strengthen the tendency towards centralization both in the European Union (for example, fiscal policy making) as well as in its member states. Still, regions as well as municipalities could play an important role in the Union that is troubled by limited legitimacy. Many citizens do not regard the Union as the government that is providing public services to them.

The economic crisis has led, as an emergency measure, to closer European cooperation on fiscal policy making. With the coming into force of the Fiscal Compact, the member states have designed a complex arrangement of fiscal norms as well as monitoring devices to control national government spending. What is fascinating about this development is that the increase of European fiscal power will reinforce a call for a European view on social-economic policy. Fiscal and social-economic policy making often go hand-in-hand and cannot be easily disconnected. National budgets were often used to combat economic stagnation and to stimulate economic growth and employment. Moreover, these problems have a strong spatial component, because economic problems are not the same in all parts of the EU (or a country if you wish), while solutions to these problems often have a strong regional component. Here lies a first challenge to European regions in the coming years. How can they support and contribute to social and economic development, together with others? And how can regions participate in the further development of these policies both at the national and the European level? In my view, their input will be essential for the success of these policies.

The second and but connected issue relates to the role of citizens in Europe—since 2013 is the year of the European Citizen, it warrants further attention. In his speech on the future of Europe David Cameron mentions one point I agree with and that is that citizens still have a problem identifying Europe as a government for them. I disagree with Cameron that a possible British exit would be the right answer to this problem, but that is a different issue. It seems that so far we have not given a good answer to this problem. In a reply to Cameron, the president of the European Parliament, Martin Schultz, proposes to have more transparency and ‘open’ debates in Europe. I am not convinced that this is the way to go.

Our national governments, including regions, are struggling with the increased mobility of goods, persons and services, while citizens also would like to see their local and national choices being respected. In trying to be as efficient and effective as possible, the Union seems to have taken on more and more tasks over time. Many problems nowadays have cross border effects suggesting that solutions need to be developed at the European level. But is that really necessary? Not all problems with cross border effects need to be resolved by Brussels. Not all problems put on the European agenda need to lead to Europe-wide legislation. Subsidiary needs to be taken seriously, also when it concerns the distribution of tasks between national and sub national governments. Unfortunately, for many the consequences of greater mobility are not yet clear. Moreover, often this discussion is dominated by nationalism and populist rhetoric. Still, what is needed is a discussion about the role of various levels of governments in Europe, including regions. If we want to be democratic, we may have to live with some policy inefficiency. When regional governments can no longer adapt their policy to the demands of their citizens, our democracies will be in danger. That is a second challenge for all of us, also for regions!

The Dutch Freedom party (PVV) has presented this week a report, prepared by the UK consulting firm Lombard Street Research, which argues that the euro has cost the Dutch economy billions. Here are some of the claims :

Growth of Dutch GDP has slumped from its pre-euro rate, as well as falling well short of growth in comparable non-euro countries, Sweden and Switzerland…
Had GDP growth in addition matched the Swedish & Swiss experience the extra consumer spending would be a further €15bn, €900 per person per annum…
Sweden and Switzerland were high savings surplus countries like Germany and The Netherlands, but they retained their own currencies and policy freedom – and the benefits were large…
While Dutch growth more than halved following the euro’s birth and Germany’s already slow growth became more sluggish, Swedish growth was unaffected in 2001-2011 compared with 1991-2001, and Swiss growth accelerated. Only wishful thinking could absolve the euro from blame. [emphasis mine]

As anyone can verify with publicly-available data, the statements above are highly misleading and the opposite of true. For the analysis that follows I pull the necessary data on GDP from Eurostat. GDP is estimated at market prices in millions of euros (at prices of the previous year) and I take the percentage yearly change [here is the actual file I use].

According to these numbers, between 1991 and 2001 the Dutch economy grew on average by 6% and by an average of 3.5% for the years 2002-2010 (after the introduction of the euro). The respective figures for Switzerland are 4% and 3.2%, and for Sweden 3.8% and 1.5%. The report compares the Netherlands to Sweden and Switzerland but ‘forgets’ to mention Denmark which is also outside the Eurozone and has an economy comparable to the Dutch one. The Danish economy grew on average by 5% in the period 1991-2001 and by an average of 3% afterwards. Let’s recap: The average Dutch GDP growth after the introduction of the euro has been greater than the GDP growth in Switzerland, Sweden, and Denmark during the same period. In other words, using this measure of economic health, we can say that since the introduction of the euro in 2002 the Dutch economy has outperformed the three comparable European countries which didn’t adopt the common currency. Now read again the claims from the report cited above and compare.

The argument of the report might be interpreted to imply that only the change in GDP growth before and after 2002 is worse in the Netherlands rather than the absolute level of GDP growth. Although this would be a very different claim, let’s see if it holds. The change in the GDP growth for the Netherlands between 1991-2001 and 2002-2010 is -2.5%, in the case of Sweden it is -2.3%, for Denmark it is -2%, and for Switzerland is -0.8%. So growth slowed in all four countries, the relative reduction in the speed of growth is very similar in the Netherlands, Sweden, and Denmark, while Switzerland has kept roughly the same level. The decrease seems greatest in the Netherlands (by 0.2%) but this is not really surprising given the very high 6% average growth in the period 1991-2001. Actually, what’s so special about 1991 as a starting date of the comparison? Nothing, of course. If we extend the reference period a little and start in 1987 instead of 1991, the Dutch decrease in GDP growth is no longer the biggest: the decline in the growth rate for the Netherlands is now 2.3%, while for Sweden it is 3.1%. Again, to recap, the non-euro Swedish economy experienced a bigger slow-down of its GDP growth than the Dutch economy after the introduction of the common currency. Which seems to be exactly the opposite of what the report claims.

Finally, let’s see a graph the puts all this together:

Obviously, only Switzerland’s growth has managed to escape unscratched from the crisis (so far) but the experience of both Denmark and Sweden shows that countries outside the Eurozone have not been immune to the effects of the crisis. [Note how the figure on page 5 of the report conveniently omits all non-euro countries, implicitly suggesting that the decline in GDP concerns only the Euro-area.]

The slowdown of GDP growth in the Netherlands is not unique, it is very similar in size to the slowdown in non-euro economies, and, most importantly, the Dutch average GDP growth is still the highest among the four countries compared here. What is the effect of the introduction of the euro on any of these is very hard to tell. But the statement that ‘Only wishful thinking could absolve the euro from blame’ is grossly misleading, and the statement that ‘Swedish growth was unaffected in 2001-2011 compared with 1991-2001’ is plain wrong.

I find it hard to believe that the simple points made in this post have escaped the research institute which has produced the report so warmly embraced by the PVV. On page 1, Lombard Street Research declares that this ‘report is intended to encourage better understanding of economic policy and financial markets.’ Selective use of data, incorrect inferences, and bombastic claims based on molehills of evidence hardly serve this goal. Politically-motivated pamphlets dressed as scientific reports hardly serve the debate about the future of economic policy in Europe as well.

Proposals to split the euro into northern and southern currency or push Greece out of the eurozone, as for example supported by Frits Bolkestein in recent interviews seem to assume implicitly that the Netherlands would always be among the richer and stronger economies of the EU. With respect to any of the EU’s member states, the assumption that it can predict what its place would be in a future divided Europe, is misguided. Polish Foreign Minister Radek Sikorski reminds us of this in a speech delivered in Berlin last Monday and reprinted in the Financial Times and in Tuesday’s NRC. His examples of economic growth amidst crisis in the EU are Poland (15,4 per cent over the last four years and no recession) and Slovakia. His reminder to Germany that it also has not always kept the rules of the Growth and Stability Pact may have been unwelcome, but it illustrates the same fact from recent history: no EU member state is immune against recession or structural problems. On the other side of this coin, not only Poland and Slovakia but other new(er) member states such as Lithuania are quietly progressing with reform and keeping their budgets healthy. In his opinion piece in the EU observer, Andreas Aslund praises Lithuania for carrying budgetary reform during the crisis without the help of the IMF, implementing a vigorous fiscal adjustment and achieving 6.6 per cent growth annualized growth rate in 2011 after a dramatic slump in GDP in 2009. Most remarkably, the Kubilius government has managed to continue Lithuania’s much praised programme of public administration reforms, initiating this year a functional review system for the administration. Such measures attest not only to prudent fiscal policy but also to a realisation that a capable and modern administration is not a luxury but necessary investment for a country that takes a long term view how to emerge from the crisis. Even Bulgaria, a member state for which no Dutch politician has a good word to say, has been praised by EU Budget Commissioner Lewandowski in October this year for being on track observing financial discipline. “Bulgaria is improving in budget terms. It is within the debt limit and is decreasing the budget deficit. The economic forecast for Bulgaria is quite decent.” Lewandowski said further.

The point of these examples is not that Slovakia, Bulgaria, Lithuania or even Poland have become as rich as the Netherlands or will be any time soon. Their citizens still suffer from the crisis and from poverty and unemployment. These member states, however, have made serious and credible efforts to keep their budgets balanced despite the crisis, a fact which is completely overlooked in the Netherlands. These newer member states should receive at least some credit for not only not causing the current crisis in Europe, but for persevering in taking fiscal discipline seriously despite the harsh effects on their citizens, on the socially weak and pensioners. Slovak doctors went on strike today because of their low salaries, Bulgarian railway workers have been told by the minister of finance that there is no money to answer their demands.

The inability to keep a balanced budget is not a mysterious cultural trait then, as claimed by Frist Bolkestein in his recent interview in AD newspaper, something typical of the Southern EU member states, while only Northern EU member states are careful and prudent in their public spending.

No, the budgetary discipline of Poland, Slovakia, Lithuania and Bulgaria today it is a question of political will, lessons learned from previous crises, commitment to the eurozone and oversight by the European Commission and the IMF. All of this perfectly applicable to Greece or other EU member states faced with similar problems.

The even more important lesson seems to me to be that all of the EU’s member states should decide the future of the eurozone as if behind a veil of ignorance about their own future place in Europe. As Sikorski aptly commented, “To those who would like to divide Europe, I say: how about a natural division into growth-Europe and non-growth Europe? But be forewarned. Their shapes would not conform to stereotypes”.

European integration a la carte, where members would pick and choose which European Union policies they participate in would be the end of the EU, so goes a familiar argument in European integration studies. Even though we do have some member states opting out of some policies (most notably Britain, Sweden and Denmark from EMU), this has been considered by many a construction that, if applied across the board, would unravel the fabric of the EU and undermine the members’ commitment to comply with everything they have commonly agreed to, or , in EU speak, to apply the acquis communautaire.

This of course is valid for any system of interrelated rules where it is important that the bulk of these rules is applied equally. Democracy would be a good example. Treaty after treaty we have been trying to make the EU more democratic and to install some of the principles of the democracy at the supranational level. However, after years of talking about how to make the EU more democratic and countless pages written to explain the democratic deficit, to me it boils down to the crucial possibility to choose between governments (‘throwing the bastards out’) and policies which is still, at the EU level, not present. Now the Greek Prime Minister is apparently contemplating asking the citizens to approve some of the most far reaching reforms in Greek history – as well as, of course, the manner in which they will pay their debt. It seems as if it is the latter which has upset (‘shocked’ was the word used by many newspaper headlines) leaders in Europe. PvDA prominent Plasterk has even declared that his party will not support the vote on the package in Parliament if the Greeks hold a referendum. This is of course a demonstration of the trilemma between democracy, financial globalisation and national sovereignty which we wrote about a few posts back (see also here). As Henry Farrell argues in Crooked Timber, instead of a disaster, it may be the most positive development for the future of democracy in Europe. Yes, it would lead to new uncertainty. But politicians in Europe have procrastinated long enough, also on democratic grounds. They may do well to remember that they may like their electorate to have a voice if it ever comes to reforms as far reaching as what Greece needs to do.

I do not entirely share Farrell’s optimism that a much better package can be devised for the Greek reforms. My experience from Bulgaria suggests that whatever support is provided for economic growth, there is a bitter pill of reforms to be swallowed before things start getting better. In this sense, I do not think it is the Greek public’s democratic right to refuse to pay their country’s debt or to exercise some kind of invented non-existent option where someone invests a lot of money in Greece without asking for changes and austerity in return. The actual realistic choices that the Greeks have are few. However, it is only right that the citizens who will bear this burden inform themselves of the alternatives and have the chance to have their say. It could be that then they will also feel some joint responsibility ( as opposed to blaming the EU, Germany or their own government for having to pay the debt) not to oppose the next set of reforms. Arguments why we, in the rest of Europe, should be against this, can only be made from the perspective of the markets and represent a confirmation of the trilemma mentioned earlier. But leaving the markets aside for a moment, blaming the Greeks for taking the time to deal with the momentous decisions ahead democratically appears to me hypocritical (what about Dutch voters in such a situation?) and against the spirit of trying to transplant some democratic principles to supranational decision making. If we are serious about making the EU more democratic, then we must at some point give citizens choices about EU decisions which really matter to them.